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EXPLAINED: What Is Carbon Trading And How It Is Used To Buy The 'Right To Pollute'

·4 min read

China has launched the world’s largest carbon trading market, which the country says will help it to become carbon neutral by 2060. Involving nearly 3,000 mainly power companies to begin with, the market covers 20 industries and up to 440 million tonnes of carbon emissions and is worth more than $1.6 billion. Although much fancied as a solution to climate change, carbon trading has faced criticism for being a complicated, often controversial, and arguably ineffective ecological solution. Here’s what you need to know.

What Is Carbon Trading?

Normally, when one talks of selling, it involves an item that a person holds, produces, or owns. But in carbon trading, the seller literally offers the buyer the carbon dioxide that it did not emit. It’s like selling good karma to a person who wants to sin, so that the burden of sin is mitigated by the good karma that has been bought.

According to the World Economic Forum (WEF), confronted with climate change and with seemingly little leeway to tackle it, “economists came up with the idea of trading the right to pollute, creating a financial incentive to curb emissions”.

The goal thus is to get everybody to reduce emissions. But in effect carbon trading, which is also known as emission trading, has become a way for companies to “buy and sell the ‘right to pollute’ from each other”.

How Does It Work?

According to European climate NGO Fern, “the model used in all current carbon trading schemes is called ‘cap and trade’. Under such a scheme, a government usually sets an overall legal limit, or ceiling, on emissions “over a specific period of time, and grants a fixed number of permits to those releasing the emissions”.

A company that is a net polluter “must hold enough permits to cover the emissions it releases”. Or, if it pollutes more than it is permitted to, it can buy carbon credits from a company whose total emissions are lower than the threshold set for it.

The concept of carbon trading originated with the Kyoto Protocol, which was adopted in 1997 and saw countries committing to achieve targets for limiting or reducing emissions. Emissions trading was envisaged as a mechanism to allow countries “that have emission units to spare – emissions permitted them but not ‘used’ – to sell this excess capacity to countries that are over their targets”.

According to the United Nations Framework Convention on Climate Change (UNFCCC), this led to the creation of a “new commodity… in the form of emission reductions or removals”. And, given that carbon dioxide is the principal greenhouse gas, “people speak simply of trading in carbon”. The initial goal was “to reduce overall carbon dioxide emissions to roughly 5 per cent below 1990 levels by 2012″… (h)owever, the Kyoto Protocol achieved mixed results and an extension to its terms has not yet been ratified”.

The ‘cap and trade’ system is a variation on the carbon trading mechanism under the Kyoto Protocol.

Why Is It Criticised?

According to the World Bank, about 40 countries and more than 20 subnational jurisdictions have some sort of carbon pricing mechanism in place, covering about 13 per cent of annual global greenhouse gas emissions. However, emissions trading has been criticised with activists saying that ‘offset credits’ — essentially the system that allows an emitter to exceed the emissions cap by paying someone else to reduce their emissions instead — “do not reduce emissions, they merely replace them”.

The BBC says that in the European Union, which was the world’s largest carbon trading market before the Chinese market opened in July this year, “political interference has created gluts of permits”.

“These (carbon permits) have often been given away for free, which has led to a collapse in the price and no effective reductions in emissions… The importance of these permits in reducing carbon emissions is questionable and the effectiveness of the overall cap and trade scheme is also reduced,” it added.

Fern argues that carbon trading is “a dangerous distraction from the need to end fossil fuel use and move to a low carbon future” as “carbon dioxide emissions in industrialised countries are not declining at the necessary rate to avert catastrophic climate change”.

Other options to cut back on emissions include applying limits on emissions that a company cannot exceed and bringing in a carbon tax that requires an emitter to pay for carbon dioxide they produce”.

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